FOMC Outlook, Treasury Yields, Inflation Trends, and Crypto Insights

FOMC Outlook, Treasury Yields, Inflation Trends, and Crypto Insights 

It feels somewhat out of character to admit that I don't feel particularly invested in the outcome of the Federal Open Market Committee (FOMC) meeting this time around, but that is indeed the case. The entire situation feels like a foregone conclusion, with the narrative around this meeting so thoroughly communicated in advance that it leaves little room for surprises or excitement. Everything about it has been meticulously forecasted and anticipated by market participants and analysts alike.

At the moment, markets are overwhelmingly pricing in a 93% probability of a 25 basis point rate cut. Based on the consensus and historical patterns, this cut is almost a certainty. Similarly, there is an 87% chance priced in that the January meeting will conclude with no rate cut, and that prediction also feels solid. The Federal Reserve has a history of aligning its decisions closely with market expectations unless faced with a sudden and dramatic shift in data or external circumstances. Currently, neither unexpected economic data nor geopolitical upheaval appears poised to derail this trajectory. As such, the outcomes of both the upcoming meeting and the one following it seem to be set in stone.

The expectation of a hawkish tone from the Federal Reserve is not misplaced. Recent jobs data, while not entirely rosy, doesn't suggest the kind of systemic weakness that would demand immediate easing. The Household Survey has shown some softness, but its reliability has long been questioned due to significant margins of error. The Establishment Survey—more widely followed and considered more reliable—also has a substantial margin for error, large enough to allow for significant deviations over time. The discrepancies between the two surveys can often persist for months or even years. If these deviations normalize, we could see a decline in unemployment rates in the near future, reinforcing the Fed's current posture.

Inflation remains a persistent concern. It has demonstrated a stubborn resistance to decline, staying elevated for longer than many anticipated. One contributing factor is the ongoing inventory buildup by companies preparing for potential tariff implementations. This precautionary activity creates additional upward pressure on prices. Moreover, broader economic optimism, as reflected in metrics like the surge in NFIB Small Business Optimism, suggests that businesses are positioning themselves for growth. This preparatory behavior further sustains higher price levels.

Seasonal factors also play a significant role in shaping the data landscape. We have consistently argued that seasonal adjustments in economic data have been skewed for two primary reasons. First, demographic shifts have altered the geographic distribution of construction activity. Traditional upward adjustments meant to account for winter slowdowns in the Northeast now appear outdated, as much of the construction industry has migrated to regions with milder winters. Second, the inclusion of COVID-era data has introduced distortions. The timing of lockdowns and subsequent reopenings has created adjustments that exaggerate economic strength in the winter months while understating it in the summer. These seasonal effects, though less pronounced than in the previous two years, will continue to artificially inflate inflation and jobs data in the months ahead. Consequently, these adjustments could lead to a perception of economic strength that keeps the Federal Reserve on the sidelines longer than might otherwise be warranted.

Even the neutral rate—the interest rate level consistent with stable growth and inflation—appears to have settled around 3.75% toward the end of 2025. This is a relatively stable projection, and while I might argue for a slightly higher figure, perhaps closer to 4%, the difference is minimal and largely academic. The Federal Reserve has successfully guided market expectations higher for the neutral rate over the past several months, moving it from 2.875% to its current level. It seems unlikely that anything emerging from this meeting will significantly alter that outlook.

On a related note, a couple of developments over the past week struck me as both surprising and telling. First was the invitation extended to Chinese President Xi Jinping to attend the inauguration. Considering the sharp rhetoric about China's trade practices, tariffs, and other points of contention, this gesture felt unexpected. However, upon reflection, it aligns with Trump's penchant for personal diplomacy and belief in his ability to sway counterparts through direct interaction. That said, the invitation carries a sense of gravity, as some in Trump's circle believe Xi failed to fulfill previous commitments related to agricultural purchases.

Another noteworthy development is the proposal to eliminate Daylight Saving Time. While not a campaign promise, it's an initiative likely to garner widespread support. Most people appreciate the idea of extended daylight in the evenings, and it aligns with Trump's desire to be seen as a leader who prioritizes popular, feel-good policies. These moves exemplify what I've come to term "Trump 1.5," a phase of strategic positioning as individuals and institutions prepare for the next administration.

Shifting gears, the trajectory of longer-dated Treasury yields has captured my attention. Unlike the predictable nature of the FOMC meeting, the path of yields has been more erratic and challenging to navigate. Recent moves toward higher yields have been strikingly one-sided, raising concerns about sustainability. Treasury Secretary Yellen's acknowledgment of regret over deficit control efforts underscores the political inertia around fiscal discipline. Neither political party appears motivated to curb spending significantly, as doing so is rarely a winning electoral strategy.

If our expectations around inflation, employment, and seasonal factors hold, the rates market could face additional headwinds. Previously, we viewed yields above 4.4% as overdone, but recent developments suggest revising our range upward to 4.4%-4.6% for 10-year Treasuries. Our outlook remains bearish for the long end of the curve, though we'll closely monitor how markets respond to resistance at these levels.

In the energy sector, the focus shouldn't solely be on extraction. During a recent Bloomberg TV segment, Ellen Wald aptly highlighted the importance of refining capacity. Only a fraction of the Strategic Petroleum Reserve's crude can be refined domestically, underscoring the need for investment in processing infrastructure. Overcoming "Not In My Backyard" (NIMBY) opposition and reexamining outdated regulations will be critical as the U.S. seeks to enhance its self-sufficiency in key resources.

The cryptocurrency space also continues to defy expectations. Recent donations from this sector played a significant role in political outcomes, illustrating the growing influence of crypto wealth. While I remain cautious about the speculative nature of these markets, the "digital gold" narrative and limited supply dynamics have undeniably driven adoption. Despite my reservations, I'm increasingly tempted to add assets like Ethereum to the portfolio, acknowledging the market's momentum and resilience.

In conclusion, while this week's FOMC meeting may lack excitement, the broader market dynamics remain anything but dull. Rising Treasury yields, the potential for seasonal distortions in economic data, and the evolving narratives in energy and cryptocurrency all provide fertile ground for analysis and strategy. As the year winds down, keeping an eye on key trends and maintaining flexibility will be essential for navigating the opportunities and challenges ahead.